Russia’s Choice
From the July 30, 2012, issue of NR

(Roman Genn)


The regime’s attempt to limit the freedoms that it reluctantly conceded is doubtless motivated by the realization that liberalization can be dangerous. Retrenchment, however, is unlikely to arrest the growth of the opposition. In recent years, the opposition staged protests over the regime’s efforts to undermine, under various pretexts, the right of free assembly. The protests had limited success. But the regime’s manipulation and bad faith in the matter of reforms to the electoral system could lead to protests on the fundamental issue of political freedom that are national in scope.

Putin’s determination not to share or surrender power is leading not only to a political crisis but, in a related development, to a seriously deteriorating economy. Despite a 4 percent rate of growth and $540 billion in reserves, Russia suffers from massive capital flight, which this year is expected to reach at least $70 billion. Russia’s businessmen are moving their families out of the country and seeking foreign passports.

The reason is the absence of law. Putin is given credit in some quarters for rebuilding state institutions after many years under Yeltsin when they barely functioned and the country was dominated by gangsters. But Putin did not restore the rule of law. He merely made it possible for bureaucrats to replace gangsters as the primary agents of criminality.

In Russia today, the corruption market is appraised by the think tank Indem at more than $300 billion annually, or a quarter of GDP. This puts Russia on a level with Cambodia and the Central African Republic. It is estimated that one-third of the cost of putting up a building in central Moscow is for construction and two-thirds is for bribes. Bribe-takers can usually keep only part of the bribe. The rest is shared with higher-ups to ensure the bribe-taker’s protection. Thus bribery has become a system.

A further consequence of this corruption is the insecurity of property. Russian businessmen live in fear of “raiding.” If under Yeltsin the preferred way of taking over property was often to arrange the murder of the owner, the pattern today is for the raiders, almost always state officials or their close relatives and friends, to appropriate property with the help of the organs of law enforcement.

A typical scheme is to place an infiltrator in a target company who will make prearranged charges of corruption, which are then investigated by law-enforcement officials in the pay of the raiders. If the possibility of being charged with a crime doesn’t persuade an owner to hand over his enterprise, he can be arrested. While he awaits trial, a judge, also in the pay of the raiders, can issue an order allowing the raiders to assume the property. There are thousands of persons in pretrial detention who have wrongly been accused of crimes at the instigation of their competitors.

An example of how the system operates is the fate of Nikolai Maximov. Vladimir Lisin, a steel magnate, agreed to buy a majority stake in Maximov’s company, the Maxi Group, but then refused to pay the agreed sum for the stake. He accused Maximov of transferring large sums out of the company to the account of his girlfriend. Lisin’s group offered to settle the matter for $100 million, but Maximov refused. Confident he would prevail in international arbitration, he demanded $287 million that he said he was owed. He called a news conference at the Marriott Hotel in central Moscow on February 14, 2012, to describe how he was being pressured. Besides reporters, however, the attendees included armed men, who arrested Maximov.

An investigator asked him why he declined the offer of $100 million. Maximov said that the investigator urged him to accept it and told him: “You won’t like the people in jail. They aren’t your type.” He was then flown to a prison in Yekaterinburg. The following month, an international commercial-arbitration panel in Moscow ruled in Maximov’s favor. With the ICA’s ruling in hand, Maximov’s lawyers appealed to courts in the Netherlands, Luxembourg, and Cyprus and succeeded in freezing the shares in six European steel mills of Lisin’s company, Novolipetsk. In response, the police investigated Maximov for fraud. Lawyers for Novolipetsk had obtained rulings suggesting that Russian courts can claim jurisdiction even if in the parties’ contract arbitration was specified as the means for settling disputes. They then argued that because Russian courts do not recognize the ruling of the arbitration panel, it was fraudulent for Maximov’s lawyers to have presented the ruling of the international commercial-arbitration panel to foreign judges in the Netherlands and elsewhere.